How to build a profitable stock portfolio

The equity market offers the best bet to beat inflation, but stock picking can be tricky. However, if you know the rules of the game and don't let your emotions rule your decisions, you can build a profitable stock portfolio. Here's how.

Don't fall for common myths:

Beware of these misconceptions that can interfere with your decisions.

A Rs 25 share is cheaper than the one trading at Rs 2,500: Some investors believe that a lowpriced stock is cheaper than the one trading at a higher price. The former may be costlier in terms of valuation if its profits are falling and there is poor revenue visibility.

A stock with lower PE is better than the one with a higher PE. While the price to earnings (PE) ratio is used to evaluate stocks, it should not be considered in isolation. A company with a higher earnings growth and better operating performance would be justified in having a higher valuation.

What goes down in the market must come up: If a company is performing consistently well, its stock price may rise steadily. However, even a growing company may see its stock price fall if the market turns bearish. On the other hand, a company whose shares have been beaten down may never rise again, especially if it is poorly managed.

Index-based stocks are safe investments: These stocks are in the indices merely because they are the largest in terms of market capitalisation and are widely traded. Every stock is exposed to the same forces and sentiment that govern the broader markets.

A stock trading at a 52-week low is cheap: If the stock is trading at a considerable discount to its 52-week high, the price differential alone does not mean the stock is a bargain buy. There might be something wrong with the company, which is why its shares are being battered. Invest only if the company's fundamentals are intact.

Investors mostly have short memories, display herd behaviour and don't like to adjust their own decisions made in the past.

Stick to the basics

Follow this time-tested strategy while building your stock portfolio:

1) Start with a small amount: Avoid investing large amounts in the beginning. Buy small quantities at regular intervals and try to get a feel of the market.

2) Have realistic expectations: Stocks can create wealth, but don't expect to get rich overnight. You might earn muted returns till you get a hang of the markets.

3) Learn from failures: As a novice, you are bound to make some mistakes. Don't get discouraged. Instead, analyse what went wrong and learn from them.

4) Invest in what you know: Buy stocks in businesses that you understand. You should be familiar with the company and the sector dynamics.